Dhakeswar1 Cotton Mills Ltd vs Commissioner Of Income Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 217 of 1953

Decision Date: 29 October 1954

Coram: Mehar Chand Mahajan, Ghulam Hasan, Natwarlal H. Bhagwati

In the case of Dhakeswar1 Cotton Mills Ltd versus the Commissioner of Income Tax, West Bengal, the Supreme Court rendered its judgment on 29 October 1954. The opinion was authored by Justice Mehar Chand Mahajan, who sat on the bench together with Justice Ghulam Hasan and Justice Natwarlal H. Bhagwati. The parties were identified respectively as the petitioner, Dhakeswar1 Cotton Mills Ltd, and the respondent, the Commissioner of Income Tax for West Bengal. The judgment date is recorded as 29 October 1954, and the bench composition is also noted as Chief Justice Mehar Chand Mahajan together with Justices Das, Sudhi Ranjan Hasan, Ghulam Bhagwati, Natwarlal H. Aiyyar and T. L. Venkatarama. The decision is reported in the official law reports as 1955 AIR 65 and 1955 SCR (1) 941, and it is cited in numerous subsequent reports, including 1955 SC 154 (pages 1-2), 1955 SC 170 (page 20), 1957 SC 78 (page 8), 1957 SC 810 (pages 4, 6, 8, 9), 1959 SC 248 (page 3), 1959 SC 742 (page 5), 1959 SC 1238 (page 27), 1959 SC 1252 (page 14), 1959 SC 1295 (page 14), 1960 SC 729 (pages 4, 7, 9), 1961 SC 1708 (pages 9, 11, 15, 17), 1962 SC 1323 (pages 2, 6, 7, 8), 1963 SC 491 (page 2), 1963 SC 835 (page 4), 1968 SC 1461 (page 10), and 1977 SC 1627 (page 12). The judgment discusses the constitutional provision Article 136 of the Constitution of India, which empowers the Supreme Court to grant special leave to appeal, and the relevant statutory provision of the Indian Income-Tax Act of 1922, section 23(3), relating to the validity of an assessment.

The headnote of the judgment explains that the scope of the powers conferred on the Supreme Court by Article 136 cannot be precisely defined; it is an overriding, exceptional power that must be exercised sparingly, with caution, and only in special and extraordinary situations. No fixed formula or rule may restrain the exercise of this power, and the safeguards for its use rest on the confidence that the Constitution places in the wisdom and good sense of the Supreme Court judges. The provision is not limited by any technical obstacles when invoked to prevent arbitrary adjudication, to advance justice, or to ensure a fair deal for a litigant so that injustice is not perpetrated or continued. The finality of a decision under any domestic law does not bar the Supreme Court from exercising its Article 136 power. The judgment also states that, although the Income-Tax Officer’s powers under section 23(3) of the Income-Tax Act are wide, they do not permit an assessment based solely on pure guesswork without reference to evidence or material. An assessment made under this section cannot rest on mere suspicion; it must involve disclosure of the information supplied by the departmental representative to the assessee, afford the assessee an opportunity to rebut that information, and consider all materials the assessee wishes to produce. Failure to do so violates the fundamental rules of justice and justifies the invocation of the Supreme Court’s special leave power under Article 136. The headnote concludes by citing the earlier decision of Seth Gurmukh Singh v. Commissioner of Income-Tax, Punjab (1944 I.T.R. 393) as an approved precedent.

The Court noted that the appeal concerned a civil matter, identified as Civil Appeal No. 217 of 1953, and arose from the judgment and order dated 16 January 1950 issued by the Income-tax Appellate Tribunal in Calcutta in Income-tax Appeal No. 4658 of 1948-49 and E.P.T.A. No. 1137 of 1948-49. The appellant, a public limited joint-stock company incorporated under the Indian Companies Act, 1915, with its registered office in Calcutta, was engaged in the manufacture and sale of cotton yarn and piece-goods. On 28 July 1944 the Income-tax Officer served a notice under section 22(2) of the Indian Income-tax Act requiring the company to file its return of income for the assessment year 1944-45, corresponding to the accounting year 1943-44. Before the stipulated filing deadline, the company’s account books and related documents were seized by the Sub-Divisional Officer of Narayanganj and were retained in the custody of the Sub-Divisional Magistrate’s court until January 1950, when they were finally returned to the appellant. Because the books were unavailable, the assessee applied for an extension of time to file the return; this request was denied and a show-cause notice was issued under section 28(3) of the Act, asking why a penalty should not be imposed for the failure to file. An officer of the company appeared before the Income-tax Officer and explained the reasons for the default. To verify the truth of this explanation, the Income-tax Officer sought information from the court and requested access to the books, but the court refused both the disclosure of the books to the assessee and the officer’s access to them. Satisfied that the explanation was genuine, the Income-tax Officer condoned the default, cancelled the penalty proceedings under section 28(3), and took no further action until 1947. In that year the company asked the department to revive the proceedings; the department complied, and the company subsequently filed its return for the assessment year 1944-45 on 16 March 1948. However, because the books had not been produced, the return was incomplete and the profits could not be computed in accordance with the statutory provisions. Upon receipt of this return, the Income-tax Officer issued a notice under section 23(2) requiring further information and specific statements, to be furnished by 19 March 1948. The chief accounts officer of the company sought additional time until the middle of the following week, but the request was refused and the assessment was finalized on 20 March 1948, with the excess-profits assessment finalized on 23 March 1948.

Under section 23(2) of the Income-Tax Act the Assessing Officer issued a notice to the company requiring it to furnish further information on several matters and to prepare specific statements enumerated in the notice. The notice stipulated that the company had to comply with the requisition by 19 March 1948. On that day the Chief Accounts Officer of the company appeared before the Income-Tax Officer and sought an extension of time until the middle of the following week in order to provide the required particulars. The Assessing Officer declined the request for an extension, and consequently the assessment was completed on 20 March 1948. A separate assessment of excess profits was finalized on 23 March 1948. The assessment order contained the following observations: “From the point of view of profits, 1943 was a very good year, if not the best, for all cotton mills. Expenses on cotton and fuel show that production was undoubtedly higher whereas it is found that the gross profit disclosed by this company is low. I conclude that the full amount of sales have not been accounted for. It is expected that actually the rate of gross profit should have been higher this year. In view of the higher costs of establishment, I take it that the rate of about 40 percent, i.e., roughly the rate disclosed in the 1942 accounts, should have been maintained. I add back Rs 36 lakhs for unaccounted sales.” The company’s return had shown a gross profit of 28 percent on sales of Rs 1,78,96,122. By comparison, the total sales for the year 1942 amounted to Rs 1,15,69,582 with a disclosed gross profit of 41 percent. The establishment expenses for 1942 were Rs 15,94,101, but in the year under assessment they had risen to Rs 34,74,735, primarily because of labour disturbances. The assessee cited several other reasons for the lower profit rate during the relevant period, but the Income-Tax Officer gave no consideration to those explanations. On appeal, the Appellate Assistant Commissioner upheld the assessment order, and the assessee subsequently filed an appeal before the Income-Tax Appellate Tribunal.

The Tribunal’s own record of the proceedings provides a concise account of what transpired. At the conclusion of the hearing on 25 November 1949, the Income-Tax Appellate Tribunal directed the departmental representative to produce, for the Tribunal’s examination, the gross profit rates that had been shown or assessed in cases involving other comparable cotton mills. The departmental representative asked for three-quarters of a day to gather the required information. The Tribunal also permitted the appellant to submit similar information concerning the gross profit rates of other similar mills. Around 29 November, the counsel representing the appellant requested additional time to prepare and file the requested data. The Tribunal granted the appellant permission to file the information by 3 December, thereby allowing both parties to present the comparative gross-profit figures for consideration.

The Tribunal authorized the appellant to submit the required information by Saturday, 3 December, and expressly allotted that interval for the filing of such details. On the appointed date, Mr Banerjee, counsel for the appellant, appeared before the Accountant Member in his chambers and expressed a desire to tender written arguments together with a trunk containing numerous books and papers intended to support his case. The Accountant Member informed Mr Banerjee that the oral arguments in the matter had concluded on 25 November and clarified that the only material permitted at that stage was the gross-profit percentages of other comparable cotton mills. He further explained that permitting the other party to consider any additional evidence or records at that late point would be unfair, and consequently the trunk of documents was returned to Mr Banerjee. During the ensuing discussion, Mr Banerjee produced a report indicating that the average gross-profit rate of several mills in Bengal was twenty-three per cent. In that same statement, an additional item labeled “Pool profit” appeared, and its amount exceeded the reported gross-profit percentage. When asked to define the term “Pool profit,” Mr Banerjee admitted that he possessed no information or explanation concerning that expression. Because of this lack of clarification, the Tribunal indicated that it could not assign significant weight to the cited twenty-three per cent gross-profit figure supplied by Mr Banerjee. Subsequently, Mr Banerjee produced a book that set out the expected wastage levels for certain qualities of cotton, asserting that a wastage rate of thirty-four per cent was normal for those grades. He contrasted this with the appellant’s own records, which showed wastage of nine per cent in 1942, twenty-six per cent in 1943, and nineteen per cent in 1944. The Tribunal observed that the thirty-four per cent figure appeared to relate to a inferior cotton quality that was not representative of the cotton generally employed by the appellant. The Department’s principal argument concerning wastage relied on the appellant’s own books, which demonstrated that wastage in the year under review was three times that of the preceding year. Considering all of this material, the Tribunal concluded that the Income-Tax Officer was justified in making a substantial addition to the gross-profit figure reported by the appellant. In deliberating the quantum of that addition, the departmental representative submitted numerous cases involving other cotton mills, which displayed gross-profit rates ranging from forty-nine per cent down to twenty-two per cent, and in one instance even thirteen per cent. In light of these facts, the Tribunal found that the Income-Tax Officer was reasonably satisfied that not all sales had been recorded in the books. The Tribunal noted, however, that further considerations remained, concluding its assessment with the phrase, “We have, however,”

The Court examined all the material presented in the case and concluded that the addition to the sales should be reduced from the amount of thirty-six lakh rupees levied by the Income-Tax Officer to sixteen lakh rupees, a reduction that would lower the gross profit rate to approximately thirty-five percent. The essence of the decisions, according to the Court, is that the Income-Tax Officer had estimated the gross profit on sales at forty percent by a mere guess, whereas the Tribunal had lowered the estimate to thirty-five percent by applying an unspecified rule of thumb, without either judgment indicating the factual basis for those figures. Dissatisfied with the Tribunal’s order, the assessee sought a reference of ten legal questions to the High Court, but the counsel appearing for the assessee before the Tribunal had argued only one issue – whether the profit estimate made by the Income-Tax Officer was excessive or justified by the material on record – and had abandoned the other points raised in the memorandum of appeal concerning the validity or correctness of the assessment procedure. The Tribunal, however, was asked to refer to the High Court not only the remaining question but also those issues that had been abandoned before it, and it held that no question of law arose from its order and consequently dismissed the assessee’s application. Thereafter, the assessee filed an application under section sixty-six of the Income-Tax Act, seeking a mandamus directing the Tribunal to refer the same legal questions to the High Court, an application that was summarily rejected, and a further request for leave to appeal to the Supreme Court was also denied. Having exhausted the remedies provided under the Income-Tax Act, the assessee then filed a special leave petition under article one-thirty-six of the Constitution against the Tribunal’s order, and the Court granted leave, bringing the present appeal before it. The counsel for the appellant argued, inter alia, that the assessment order issued under section twenty-three, sub-section three, of the Income-Tax Act violated natural-justice principles because it was not based on any material and because evidence offered by the appellant had been improperly rejected. The appellant further contended that the Tribunal had acted without jurisdiction by relying on data supplied by the Income-Tax Department behind the appellant’s back and without giving the appellant an opportunity to rebut or explain that data, and the counsel relied upon a Full Bench decision of the Lahore High Court in Seth Gurmukh Singh v. Commissioner of Income-Tax, Punjab, to support the proposition that an officer making an estimate must disclose the material on which the estimate is based and must provide the assessee with full particulars of any private inquiries intended to be used against him, thereby affording the assessee a reasonable chance to meet the case against him.

The Court noted that when proceeding under sub-section (3) of section 23, the Income-tax Officer was not bound to rely on evidence produced by the assessee if he considered that evidence false; however, if the Officer intended to make an estimate in disregard of such evidence, fairness required him to disclose to the assessee the material on which the estimate would be founded, and if the Officer proposed to use the result of any private inquiries, he must communicate to the assessee the substance of the information to such an extent that the assessee possessed full particulars of the case he was expected to meet and must further give him ample opportunity to meet it. It was submitted that the Tribunal had failed to disclose to the assessee the material that the departmental representative had supplied to it concerning the rates of gross profit of cotton mills varying between forty-nine per cent and thirteen per cent, and that, had that disclosure been made, the assessee could have shown that the mills which had shown gross profits at those rates bore no similarity of any kind with the appellant’s mill or with other mills in Bengal, and therefore those rates were irrelevant to the enquiry as to the gross profit of the assessee’s company. It was further argued that both the Income-tax Officer and the Tribunal acted arbitrarily and on suspicion in estimating the rate of gross profit. In conclusion, counsel urged that now the books of account of the company were available, it was only just and fair that the Income-tax Officer and the Tribunal examine those books in order to determine the correctness of the return furnished by the assessee. The learned Solicitor-General, appearing for the Commissioner of Income-tax, West Bengal, opposed the contentions raised by counsel on two grounds. First, without questioning this Court’s jurisdiction to grant special leave against an order of an Income-tax Tribunal, he argued that such leave should not be granted when remedies provided by the Income-tax Act itself were available for correcting Tribunal errors and had been pursued without success; he emphasized that the power conferred by article 136 of the Constitution was extraordinary and should be exercised only in cases of patent procedural error or a failure of justice due to violation of natural-justice rules, not for reviewing findings of fact that the law declares final and conclusive. Second, he contended that the finding given by the Income-tax Officer and affirmed by the Appellate Assistant Commissioner and the Tribunal was based on material and

The submissions argued that the Income-tax Officer possessed very wide powers and was not constrained by technical rules of evidence or pleadings. It was further submitted that the only limitation on his judgment was that he must act honestly on the material before him, however inadequate, and not capriciously or arbitrarily. The argument also maintained that, because of the disparity in the rate of wastage, the Officer was entitled to conclude that the assessee had not disclosed the full sales made during the accounting year. On that basis, the Officer was considered authorized to make an estimate of the rate of gross profit on his own information. Regarding the first contention raised by the learned Solicitor-General, the Court was unable to accede to it in its present form. The Court observed that the limitations on the discretionary jurisdiction conferred by article 136 of the Constitution cannot be defined with precision. Such limitations are implicit in the nature and character of the power itself, which is exceptional and overriding. Consequently, the power must be exercised sparingly, with caution, and only in special and extraordinary situations that justify its use. Beyond this principle, the Court held that no fixed formula or rule could fetter the exercise of this authority. The Constitution, by entrusting the wisdom and good sense of the judges, provides a sufficient safeguard that the power will be used only to advance the cause of justice. Its exercise will be governed by well-established principles applicable to overriding constitutional powers that have developed through judicial precedent. However, the Court clarified that when it finds a person has been dealt with arbitrarily or a court or tribunal has not given a fair deal, no technical hurdle can block use of article 136. The Court reasoned that the purpose of article 136 is to ensure that injustice is not perpetuated by decisions of courts or tribunals that have been rendered final by statute. Thus, the first contention raised by the learned Solicitor-General was deemed fully disposed of by the foregoing discussion. Concerning the second contention, the Court agreed with the learned Solicitor-General that the Income-tax Officer is not bound by technical evidentiary rules. The Officer may nevertheless rely on material that might not be admissible in a court of law, but the Court noted that this does not permit a pure guess in assessment under section 23(3).

In this case the Court observed that the Income-tax Officer could not rely on a mere guess or on an assessment that lacked any reference to evidence or material. The officer was required to have something more than a bare suspicion in order to support an assessment made under section 23(3). The Court noted that the rule of law on this point had been fairly and correctly expressed by the Lahore High Court in the decision of Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab. The Court then held that the Tribunal had violated fundamental rules of justice in reaching its conclusions. Firstly, the Tribunal had failed to disclose to the assessee the information that had been supplied to it by the departmental representative. Secondly, it had not given the company any opportunity to rebut the material furnished by that representative. Thirdly, the Tribunal had declined to consider all of the material that the assessee wished to produce in support of its case, thereby denying the assessee a fair hearing. The Court further observed that both the Income-tax Officer and the Tribunal appeared to have based their estimate of the gross rate of profit on sales on surmises, suspicions and conjectures. It found it surprising that the Tribunal had taken from the department’s representative a statement showing gross profit rates of other cotton mills, yet had not shown that statement to the assessee nor given him a chance to demonstrate that the statement was irrelevant to the mill in question. The Court noted that it was not known whether the mills that disclosed those rates were located in Bengal or elsewhere, or whether they were similarly situated. Moreover, the Tribunal had not shown the information given by the departmental representative to the appellant and had refused to examine the trunk load of books and papers that Mr Banerjee had produced before the Accountant-Member in his chamber. The Court opined that no prejudice would have resulted if, after notifying the department, the trunk had been opened and time allocated to examine its contents. The assessment in the present case and the connected appeal was reported to be above the figure of Rs 55 lakhs, and the Court considered it appropriate, given the magnitude of the matter, not to employ unnecessary haste and impatience, especially when the department knew that the assessee’s books were in the custody of the Sub-Divisional Officer, Narayanganj. The Court concluded that both the Income-tax Officer and the Tribunal, in estimating the gross profit rate on sales, had acted on pure guess and suspicion rather than on any material. Consequently, the Court deemed the matter suitable for the exercise of its power under article 136. Accordingly, the Court allowed the appeal, set aside the order of the Tribunal and remanded the case to it with directions that, in arriving at its estimate of gross profits and sales, it should give full opportunity to

The Tribunal shall permit the assessee to submit any relevant material that it wishes to place before the Tribunal on the matters that are before it, whether such material is discovered in the books of account or is located elsewhere. The Tribunal shall also disclose to the assessee the material on which it intends to base its estimate, and shall give the assessee a full opportunity to meet and address the substance of any private inquiries made by the Income-tax Officer, in the event that the Tribunal intends to rely on the findings of those inquiries for its estimate. The department shall likewise be open to place any evidence or material on the record in order to support the estimate made by the Income-tax Officer or by the Tribunal in its judgment. If the Tribunal thinks it appropriate, it may remit the case to the Income-tax Officer for making a fresh assessment after taking into account any further evidence furnished by the assessee or by the department. The coats; of these proceedings will abide the result. The case is remitted.